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What is gap insurance?


Gap insurance, also known as loan-lease payoff coverage, can provide valuable financial protection during the early years of your car's life if you have a loan or a lease. 

If a loss occurs, gap car insurance will pay the difference between the actual cash value (ACV) of the vehicle and the current outstanding balance on your loan or lease. Sometimes it will also pay your regular insurance deductible.

Car owners often assume that if their car is totaled, it will be replaced at the amount they paid, or at least the amount they owe. This is not so. That is why many car insurance companies offer gap insurance (loan/lease payoff insurance) as an optional coverage that is available with physical damage coverage. Typically, a stand-alone gap policy is sold by a car dealer at a higher cost.

If your insurer totals your vehicle by a covered peril, such as an accident, theft, fire, flood, tornado, vandalism, or hurricane, the insurer will pay you the actual cash value for your car, if you have comprehensive and collision insurance. This amount is often considerably less than the actual amount you still owe on your loan or the amount due for a lease payoff.

When the amount of your ACV payout is less than what you owe on your lease or loan, the loss from this financial shortfall is the "gap" you can be left owing. 

This is how a "gap" occurs (using fictitious numbers):

  • You buy a car that costs $25,000 and drive it off the lot.
  • After paying the down payment, you owe $24,000 in car payments over five years (0% interest loan = $400 car payments).
  • You purchase physical damage insurance (comprehensive and collision) with a $500 deductible to protect you against damages and loss.
  • You have an accident while you're still upside down on your loan or lease (meaning you owe more on a car than it's worth) and your vehicle is totaled.
  • The insurance company determines that the actual cash value of the car is only $22,000, but at the time of the loss you still owe $23,500.
  • Gap insurance should pay the difference plus your deductible, totaling $2,000. (Note: not all gap policies pay the deductible).

Here are the line items:

  • Loan payoff at the time of accident: $23,500
  • Vehicle's actual value at the time of accident: $22,000
  • Your deductible: $500
  • Physical damage insurance pays: $21,500 ($22,000 minus $500 deductible)
  • Gap insurance pays the difference between what is owed and what the physical damage insurance company pays (plus your deductible): $2,000

Many car owners don’t take into account the depreciation that takes place with a new car. Within minutes of driving off the lot, a new car can be worth 10% less than what you just paid. In our example above, if you owned the car for three days, had physical damage coverage and the car was totaled, you could owe 10 to 20% of the $24,000 ($2,400 to $4,800 out of your pocket) even though you purchased "full coverage."

How much does gap insurance cost?

If you purchase gap insurance from a car insurance company, it will cost $41 a year, on average, CarInsurance.com's rate analysis of major insurers found. 

In some cases when you are insuring a new car, you can get gap coverage as an add-on endorsement to your standard policy; check with your insurer to find out if it is offered. You must also have collision and comprehensive coverage on the policy.

Buying gap insurance from a lender or dealership is much more expensive. Lenders typically charge between $500 and $700, according to United Policyholders, a non-profit consumer advocacy group.

Is gap insurance worth it? 

The answer to this question depends on your situation. It's a good idea to get gap insurance if you owe well more more than what the car's worth. 

So, for instance, if you bought a $80,000 car and only put down $5,000, you may want to get gap insurance so you're not stuck having to make up the difference if an insurer totals your car. 

If the outstanding loan or lease balance is only slightly more than the vehicle's, you may want to chance it. In that case, it's a good idea to put some money aside in case you need it if an insurer totals your car. 

So, you may find gap insurance is a good idea when:

  • Your loan is at least 48 months
  • You lease your car
  • You put a small down payment on a new vehicle
  • You rack up the miles and your car will depreciate quickly

Can I get gap insurance without primary insurance?

Even if you get gap insurance, you still need your state's minimum auto insurance coverage. That's the insurance coverage the police check for if you are stopped and asked for your insurance card).

While most states require you to have certain car insurance coverages, typically at least bodily injury liability and property damage liability, for your gap insurance to be in effect you need to carry physical damage coverages of collision and comprehensive on your vehicle as well. This "full coverage" of liability and physical damage coverages is also normally required by your lien holder.

Does a late car payment void out gap policy?

No. Being late with your car payment won’t void out your gap insurance policy. 

However, your gap insurance won’t pay out for the late payments if you total your vehicle and you're behind on payments. Gap insurance usually pays out the difference between your wrecked car’s ACV and the remaining balance due to your lien holder on your car loan. But there are exceptions and conditions to gap policies for certain items, such as late car payments.

If you have overdue payments or were granted a payment holiday so that some payments were moved to the end of your loan, this amount wouldn’t be covered by your gap insurance policy. If had you paid on time these monies would not have been due at the time of the total loss.

Will gap insurance kick in if the car is declared a total loss but your claim was denied, or worse, if the primary insurance wasn't active at the time of the accident?

No, gap insurance will not cover your car if it's declared a total loss but your claim is denied for coverage or if you did not have primary insurance coverage on the vehicle at the time of the accident.

Can I purchase gap insurance on a used vehicle?

Yes, typically you can. State laws and insurance companies’ guidelines vary, but there are gap policies that are available for used cars that are financed. Gap insurance is beneficial when the value of a vehicle, whether new or used, depreciates while you still owe money on the loan or lease.

Can I get gap insurance on a loan that is not specifically used for a vehicle like a Home Equity Line of Credit (HELOC)?

You cannot get gap insurance for lines of credit that may be used for purposes other than a vehicle. Gap insurance doesn’t work with mortgage loans, credit lines, balloon payments or other types of non-vehicle specific loans.

If you have used money from your Home Equity Line of Credit (HELOC) to purchase your vehicle, gap insurance would not cover this type of loan since the HELOC is not specifically to be used for a vehicle loan.

Gap insurance is normally only able to be purchased and used when you have received your money through a conventional auto loan or lease to obtain your vehicle.

Can I buy gap insurance for a car that I bought if a private person is holding the loan?

Gap insurance providers won’t offer coverage if your loan is through a private individual.

When dealing with a bank or finance company, the gap insurance carrier knows the terms, sees the paperwork, etc. With a private party loan, it is hard for the gap carrier to be assured that the loan is only for the vehicle, payments were made properly, etc. – all things that an insurer requires.

Is gap insurance an acceptable proof of insurance at the DMV or for police?

Gap insurance isn’t accepted by any Department of Motor Vehicles as proof of insurance. It’s not the right type of insurance needed to show financial responsibility when you're going to register, or renew registration, on your vehicle.

Showing proof of gap insurance to law enforcement wouldn’t help if they ask you for proof of insurance. Gap insurance is optional coverage that only helps you out in a total loss situation, it doesn’t provide the state-mandated liability coverage that police want to verify that you have on your vehicle.

If I bought my car outright, do I need gap insurance?

There's no reason to buy gap insurance if you bought a car with cash and thus did don’t have a lien holder. Gap insurance is for when you owe more than the value of your vehicle. If you have the car paid off and it’s no longer financed, you don’t owe anymore more than the car is worth, and so there would be no payout from gap insurance.

Am I due a refund on part of my gap insurance if I pay the car off or trade it in?

If you financed your vehicle and the gap insurance is part of your vehicle's financed monthly payment, it is doubtful that you would receive any refund for your gap insurance. That is because when the coverage gets paid for monthly -- as part of your financed monthly payment -- the coverage is used that same month.

If you paid for your gap insurance policy in full, you will need to contact the company that sold you the policy to see if there is any unused premium that should be refunded back to you when you trade in or pay off your car.

Can you buy gap insurance anytime? How long do I have to buy gap insurance?

Gap insurance providers' terms and guidelines differ; in general gap insurance is available on new, used and refinanced cars, trucks and SUV’s leased, purchased or refinanced within the past 12 months. So if you know within the year after financing, leasing or refinancing your vehicle that you owe more than its ACV gap insurance could be beneficial for you.

Is gap insurance transferable from one vehicle to another?

Gap insurance can't be transferred to a different vehicle or loan. If you're trading in, selling, or buying a new vehicle, you'll need to get a new policy to cover the newly financed vehicle.

Is gap insurance transferable after a refinancing?

Gap applies to a specific loan or lease and typically is non-transferable. If you already had a gap policy in place, that gap insurance would normally be voided out when you refinance a vehicle -- you would need to get a new gap insurance policy on it.

If I paid a high down payment, do I need gap insurance?

If you put down a decent down payment, your vehicle depreciates at a steady pace, and you're paying down the balance of the loan each month, you typically wouldn’t need gap insurance coverage. 

Gap insurance is only needed if you have negative equity in your car (owe more than the value of the vehicle) since this coverage only pays for the balance of the loan left after the ACV is paid out when your car has been found to be a total loss by an insurer. 

Does gap insurance come with a deductible?

No, gap insurance doesn't normally have a deductible. 

Will gap insurance pay your physical damage (collision or comprehensive coverage) deductible?

The answer depends upon your gap insurance policy. Some policies pay the deductible and some don't. When gap insurance pays the primary insurance deductible amount, the deductible amount isn't actually reimbursed back to you. Rather, the primary insurance deductible is taken from the payout of your totaled vehicle and covered as part of your unpaid loan balance, which gap insurance pays.

Is gap insurance required by law?

While gap insurance is good to have if you owe more on a vehicle than its value, it isn’t required by any state as part of your car insurance policy.

Gap insurance is optional coverage; however, it’s not uncommon for lease contracts to have gap insurance included in them. Sometimes it's referred to as auto loan/lease coverage or loan/lease payoff coverage.

If a lender of leased cars requires gap insurance, they must include the gap insurance within the lease's cost itself. This means that the monthly price quoted by the dealer must include gap insurance when they mandate you carry this coverage.

There are some financial institutions that may want you to have gap insurance as part of your auto insurance policy on the car you're purchasing. If this is the case, your loan or lease papers should note this.

If you have declined gap insurance, a dealer shouldn’t be able to add it on to your loan amount or charge you for it in another way. Even though gap insurance may be helpful if you owe more on the vehicle then its ACV and were to be in an accident, you should have the right to turn down this coverage and thus not be charged for it.

For example, the California Car Buyer’s Bill of Rights requires disclosure of the price of items commonly packed into loans, such as theft etching on windows and other car parts, gap insurance or extended service contracts.

In general, dealers anywhere should provide car buyers with an itemized price list for all these items, such as warranties and insurance, if the items are being financed.

If you have a charge for gap insurance from your lender and don’t have this coverage, discuss the matter first with the financing company that added into your payment. Unless you signed paperwork stating that you would add gap coverage to the car at the time of purchase as part of your finance or purchase agreement you should be able to decline it and get a refund.

If you don’t want gap insurance and have problems getting it removed, try contacting your state agency's consumer division. The office of the insurance regulator should be able to help you.

What is a gap waiver?

A gap waiver is different in that it is an agreement under which the creditor agrees to waive the lessee or debtor’s obligation for the difference between the "gap amount" and the actual cash value of the property. On a leased car, the cost of gap insurance or waiver is generally rolled into the lease payments.

Can I cancel my gap insurance?

Yes, usually you can cancel gap insurance if you determine that you no longer need it. 

Gap insurance policies, terms and fees vary. To find out about how to cancel your existing gap insurance policy, you’ll need to read through the contract. If you still have questions, contact the insurer directly. 

If you recently purchased the policy, depending upon your gap insurance company, you can receive a full refund if you cancel within a certain time period (typically 30 days). A cancellation fee may apply. 

After that initial period, if you cancel the policy, you normally will receive a prorated refund. Also, any refund would come only if you paid in full upfront for the gap insurance policy. If your gap insurance coverage were set up so that you paid a monthly amount for it (for instance, included in with your monthly car loan), you should still be able to cancel the gap policy. However, you shouldn’t expect a refund since the portion you paid each month would have been used in that month already.

If you’re still upside-down on your car’s loan, gap insurance is likely still needed.  If you now owe less than the car's ACV, you could cancel your gap insurance since it would not pay out if your car were totaled out by an insurance company after an accident.  

If you no longer want your current gap insurance policy because you believe you paid too much for it, shop around to see if a cheaper policy is possible. If it is, then see about canceling out your current one before buying the new one.

If you bought your gap insurance through a dealership or finance company, it is quite possible that you could find a policy with a credit union or auto insurance company for much less.  We recommend shopping around for gap insurance, just as you should for the car insurance policy for a new car. 

When does gap insurance end?

You don't need gap insurance once you've paid off your car loan, or even once you owe less than the actual cash value of your car. At that time, you should notify your insurer that you want to cancel coverage. Otherwise, it will remain in force until the end of the gap policy terms.

What isn't typically covered by gap insurance?

Gap insurance usually won’t pay for:

  • Overdue lease/loan payments
  • Costs for extended warranties, credit life insurance or other insurance purchased with the loan or lease
  • Carry-over balances from previous loans or leases
  • Financial penalties imposed under a lease for excessive use
  • Security deposits not refunded by the lessor
  • Amounts deducted by the primary insurer for wear and tear, prior damage, towing and storage
  • Equipment added to the car by the buyer, meaning that only factory-installed equipment is covered
  • Mechanical issues, such as engine or transmission failures, or any other car problems that are not losses covered by your car insurance policy.

If you want more details on buying gap insurance and what it covers, read "5 tips for buying gap insurance for your new car."

When did gap insurance start?

Gap insurance began in the early 1980s to help those insured who purchased a car and found themselves owning more than the car was worth if it was in a total loss situation.

The higher price of motor vehicles, longer-term auto loans and the increasing popularity of leasing in the 1980s is what created gap protection as a type of insurance for car owners.

What does gap, sometimes referred to as GAP, stand for?

GAP stands for Guaranteed Auto Protection or Guaranteed Asset Protection, depending upon who you ask.

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116 Responses to "What is gap insurance?"
  1. Jessey

    I didn't have a license at the time of my accident will gap insurance still cover my total loss ?

  2. Chris Hoskins

    My father had gap insurance on his Sherrod E150 Van however he passed away. Will gap insurance cover the rest of the van to where it is paid off and I am able to keep the van? If not will the car dealership owe me any money back for the gap insurance payments? Please help!

  3. Cecelia

    Thanks for this information, it's exactly what I needed! %uD83D%uDC9A

  4. Judith Bosowski

    If you buy a used car and want gap insurance, can the car be too old to quality?

  5. max

    If my car is totaled before my monthly note is due, do I have to pay that month's car note?

  6. Name

    When does gap insurance end?

  7. jayson

    I paid off my car early. Can I get a gap insurance refund?

    1. Melba Brock June 21, 2016 at 8:10 PM

      I paid off my car early. Am I due a refund from GAP insurance?

        Reply »  
  8. Jonathan Gimbert

    What if the car dies in the driveway and it can't be fixed?

  9. Ann Levasseur

    If a car is repossessed and the bank's sale of the car is less than the loan owed, will GAP insurance pay off the rest of the loan? Does this cover all the add-ons the dealer put on the contract raising the loan amount? Example: If the car's purchase was $12,500 but add-ons (including GAP ins) raised the total loan amount to $19,096) with only 5 payments made.

  10. Charlie Thomas

    If auto is paid off and gap insurance is never used, do you get a refund?

  11. lisa

    I have four payments left on my vehicle, when I pay the car off will my insurance go down because I will no longer have to pay that GAP insurance?

  12. DEE

    I was driving my truck down a dirt road in a heavy rain. I hit a hole full of water and the truck shut off. It wouldn't restart and when it was looked at water was found in the motor an oil pan. Will gap pay to fix it?

    1. edward crawford October 04, 2016 at 2:17 PM

      Does gap pay for major motor repairs?

        Reply »  
  13. Nitin

    Thanks for the Info :)

  14. Teresa

    If your vehicle was wrecked and totaled will gap insurance give you the money toward another vehicle?

  15. char

    What if I buy a car, get gap insurance and then two days later am hit by a car? I was getting the mail am now temporarily or possibly permanently disabled. Is there disability protection?

  16. Kenny

    I have a question about gap insurance. I had it on a car in 2011. One year later my wife was in a accident. Insurance paid all but $1,000 dollar, and I don't know why. I do know they are taking me to court in two weeks to collect the money, but as for today they seized my bank account collecting it all, is that allowed by law?

  17. cody anders

    Recently a man ran a red light and struck my vehicle. My truck is now totaled. I have GAP insurance, how do I collect or get reimbursed on my funds with GAP?

  18. Anne Hertzen

    Hi. I have made 14 payments on my vehicle and have decided that I possibly need gap insurance for the security of the future in case anything happens. Can I still purchase gap insurance even though it has been over a year since I purchased my vehicle?

  19. patrick

    I paid off the car loan early? Do I get a refund from my gap insurance?


    Does gap insurance cover you if you lose your job? Will it cover your car payment?

Disclaimer: Answers and comments provided are for information purposes. They are not intended to substitute informed professional advice. These responses should not be interpreted as a recommendation to buy or sell any insurance product, or to provide financial or legal advice. Please refer to your insurance policy for specific coverage and exclusion information. Please read our Terms of Service.

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